Economics - Definitions spreadsheet

Natural resources

Natural resources: Productive inputs derived from nature that are used in producing goods and services

E.g. minerals, water, climate, oil, land 

• They have the potential to support a variety of primary (extractive), secondary (manufacturing) and even tertiary (service) industries 

Labour resources

Labour resources: Mental and physical effort that people provide to produce goods and services 

E.g. doctors, accountants 

• Entrepreneurship is a specialized type of labor resource that represents the skills of management, company leadership and organization 

• Most of Australia’s labor force is employed in tertiary industry 

Capital resources

Capital resources: manufactured or producer goods that are past production being used to aid the production of other goods and services 

E.g. tractors, factories, commercial buildings, schools, machinery 

Relative scarcity

Basic economic problem – where wants and needs are unlimited however the resources used to fulfil and produce these wants and needs are limited, resulting in people having to be make decisions as to which wants and need to be satisfied first based on their priorities 

Opportunity cost

Opportunity cost: the value of the benefit forgone, when resources are used in the production of the next best alternative good or service 

• Opportunity cost can be measured in dollar terms, time and external costs (costs transferred on to others) 

PPF

Production possibility frontier (PPF): a curve that shows the total possible combinations of two goods and/or services that an economy can produce when using all its resources to maximum efficiency 

Three basic economic questions

1. What and how much to produce?

2. How to produce?

3. For whom to produce?

In a market capitalist economy like Australia's, these questions are mostly answered through the operation of the market. Firms produce what is demanded by consumers. They do it by combining resources at the lowest possible cost based on the markets for resources. They produce for the people willing to pay them for the product/are able to afford them.

Allocative efficiency/efficient allocation of resources

Allocative efficiency/efficient allocation of resources: when resources are used to produce goods and services that best maximize society’s wellbeing and living standards in both short and long-term 

 

• All points on the PPF could represent an efficient use of resources --> however the combination/point chosen depends on society's preferences 

• However if a point that is inside the PPF is chosen, that means resources are being used inefficiently 

Productive/technical efficiency

Productive/technical efficiency: occurs when goods and services are produced by using the lowest cost production methods and with minimal wastage of resources + all resources are being used at maximum efficiency

• maximum outputs from minimum inputs

 

• All the points on the PPF are productively efficient however points inside the PPF are productively inefficient 

• An increase in technical efficiency shifts the PPF outwards, allowing more goods and services to be produced, improving society's living standards 

Dynamic efficiency

Dynamic efficiency: when an economy can quickly reallocate its resources in response to the changing needs and wants of consumers to achieve allocative efficiency 

• Dynamic efficiency affects the speed of change from one point on the PPF to another point 

• Increased dynamic efficiency will also help to boost allocative efficiency as it ensures that resources are able to quickly go to where they are most wanted by society 

Inter-temporal efficiency

Inter-temporal efficiency: exists when resources are allocated optimally between current consumption and future investment to increase future consumption and living standards. 

 

• More investment in the present can shift the PPF outward in the future 

Perfect markets / Perfect competition

A market with perfect competition has: many sellers and many buyers; homogenous products; ease of entry into and exit from the market; perfect information; high mobility of resources; sellers who seek to maximise profit; and buyers who seek to maximise utility.